Imara Capital Securities says it expects Sefalana to continue registering bottom-line growth despite rising inflation across the company’s jurisdictions, particularly in Botswana, which presents a conundrum for the Fast Moving Consumer Goods (FMCG) sector as the inflation is a double-edged sword.
In its latest Equity Research Report, the leading stockbroking company says this is largely due to the FMCG outlet’s geographically diverse nature, its continued expansion and cost saving potential through economies of scale in its ability to buy in bulk and stock products in its larger wholesale facilities.
“In line with the company’s diversification strategy, Sefalana embarked on the second phase of its investment in Australia in November 2021, which entails the acquisition of up to five more stores, of which one has already been acquired,” says the Imara report. “Given the company’s exposure to the softer African currencies, we are of the view that exposure to the Australian Dollar will hedge against possible adverse effects of foreign exchange losses.”
Assigning a BUY rating on Sefalana shares, Imara says its positive outlook on the counter is driven by the company’s proven ability to weather the storm in anticipation of increased footfall post the State of Emergency in Botswana to bolster earnings. Moreover, the stronghold Sefalana commands in Namibia, evidenced by its continued growth despite weakness in the economy, positions it favourably to benefit positively from the long-term prospects of economic upliftment with the recent oil discovery in the Orange Basin.
“With regards to Australia, the Season’s group is expected to contribute positively to the company’s bottom line in the long-term once the IFRS 16 front loading lease and depreciation charges unwind,” says Imara. “Further growth, however, (which is heavily linked with the containment of COVID-19 variants and vaccination efforts) will depend on economic recovery across the counter’s geographies. On the backdrop of the above mentioned, we are bullish on Sefalana.”
Sefalana’s share price registered a marginal 0.96 percent year-on-year gain to P9.45. At its current price, the counter is trading on a Price to Earnings Ratio (PER) of 10.93x and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of 7.22x while its peers are trading at averages of 18.56x and 7.82x, respectively.
“In general, we remain confident in the counter’s operations and maintain a positive outlook,” says the stockbroker. “Our valuation yields a target price of BWP11.03 representing an upside potential of 16.67 percent. We therefore recommend a BUY on the counter.” Regarding the company’s preference share investment in the South African consortium, Sefalana decided against exercising its option to convert to a 30 percent equity stake and will therefore redeem its investment of R250 million in July 2022.
In terms of expansion for 2022, the company has planned four new store openings in Botswana and is continuing with development of existing stores through Liquor, Wings & Things and Fruit & Veg. The company is due to commence construction of a 3,000 sqm warehouse facility at Foods Botswana Beverages in the early stages of the current year and advancement of the second phase of its Australian business is underway with the company targeting to acquire up to four new stores. Moreover, the company is currently evaluating a manufacturing opportunity in Botswana.
Sefalana’s robust bottom-line performance resulted in the group’s investment income improving by 11.66 percent to P25.5 million from P22.8 million in the prior comparable period and finance expenses increased by 19.44 percent to P12.5 million as compared to P10.47 million in the first half of 2021. As a result, the company’s profit before tax increased by 2.60 percent to P152.6 million compared to P148.7 million in the first half of 2021.
Earnings did, however; decline by 21.34 percent to P89.1 million compared to P113.2 million in the first half of 2021. Imara states that this was on the back of a 17.8 percentage point’s rise in Sefalana’s effective tax rate to 41.63 percent. This was due to a one off acceleration on withholding tax paid on dividends prior to the rise in local withholding tax rates on 1st July 2021. By doing so, the company made an overall tax saving of just over P7 million and the savings will be realised in the coming years.
As such, Sefalana’s net profit margin shed 1.33 percentage points to 2.55 percent from 3.89 percent in the first half of 2021.The company declared an interim dividend of 10 thebe per share, bringing the annualised dividend yield and payout ratio to 3.81 percent and 52.04 percent respectively.
Registering strong growth from organic and inorganic bases, Sefalana’s revenue for the half year grew significantly by 19.77 percent year on year to P 3.5 billion as compared to P 2.9 billion in the first half of 2021. Growth was generally underpinned by the gradual lifting of COVID-19 related restrictions across the company’s jurisdictions as well as four additional store openings during the period under review.
Imara notes that the improvement in operating conditions across the group’s different jurisdictions relative to the prior comparable period were reflected in sales growth reported in all of its Trading Consumer Goods segments. The company’s balance sheet had a modest growth; during the period under review grew by 2.63 percent to P 3.34 billion from P 3.25 billion in the 2021 financial year. Non-current assets were up by 1.06 percent mainly on the back of a 7.70 percent increase in investment properties to P 227.3 million from P211.1 million in the 2021 financial year.
